CFO Breakout Session: Accounting & Auditing Update Norman
Mosrie, CPA, CHFP, FHFMA Partner Dixon Hughes Goodman LLP
Charleston, WV January 19, 2012 west virginia chapter Winter
Conference
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Agenda EHR Incentive Payments ASU 2010-23: Charity Care
Disclosure ASU 2010-24: Health Care Entities Presentation of
Insurance Claims and Related Insurance Recoveries ASU 2011-04: Fair
Value Measurement ASU 2011-07: Presentation and Disclosure of
Patient Service Revenue Miscellaneous Debt Topics GASB Developments
Question & Answer Session Disclaimer 2
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EHR Incentive Payments
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Background American Recovery and Reinvestment Act of 2009
Established incentive payments for professionals and hospitals that
meaningfully use certified electronic health record (EHR)
technology Goal of incenting hospitals to use EHR to: Improve
quality, safety, efficiency Improve coordination of health care
Maintain privacy/security 4
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Medicare Incentive Payments Incentive payment consists of: Base
sum of $2 million Plus $200 per discharge (between 1,150 23,000)
Collectively multiplied by the Medicare share and a transition
factor from 100% (Year 1) to 25% (Year 4) Incentive payments
unavailable for hospitals that first become meaningful users after
2015 5
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Medicare EHR Accounting and Reporting HFMA Issue Analysis Paper
December 2011 www.hfma.org/EHRPayments Overview of Accounting
Models Contingency Grant SEC registrants vs. Non-registrants 6
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Medicare EHR Accounting and Reporting Contingency Accounting
Model Contingencies must be resolved prior to recognizing revenue
Compliance with meaningful use for full reporting period Discharge
information related to discharges in the hospitals cost report year
that begins in EHR reporting period EHR reporting period is based
on Federal fiscal year of October 1 through September 30 th
Consequently, under this model typically the contingency related to
discharge and other final payment calculation data is not met until
the last day of the cost report year Incentive payment income
recorded entirely in period last contingency resolved SEC has
informally indicated that registrants should follow this model
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Medicare EHR Accounting and Reporting Grant Accounting Model
Grant income is recognized Hospital complies with grant
requirements Payment is reasonably assured Cliff recognition
Hospital unable to determine compliance until after EHR reporting
period has ended Income recognized all at once 8
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Medicare EHR Accounting and Reporting Grant Accounting Model
(continued) Estimation recognition Reasonable assurance of
compliance with minimum number of meaningful use criteria and other
grant requirements Income recognized ratably over the period once
reasonable assurance is met If reasonable assurance met during
interim point during the reporting period, then a cumulative
catch-up adjustment is made If reasonable assurance is no longer
met, then a change in estimate would be made in that period 9
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Medicare EHR Accounting and Reporting Reasonable assurance is
judgmental How long has the hospital been operating and EHR system?
How far along is the hospital with implementing computer physician
order entry (CPOE)? How reliable are the processes and controls in
place? Is the hospital doing the bare minimum to qualify for
meaningful use (i.e. in Stage 1, hospitals have to comply with 14
core objectives and 5 of 10 menu set objectives)? 10
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Medicare EHR Accounting and Reporting Statement of operations
presentation Nongovernmental hospitals -Operating or non-operating
on a facility basis that complies with existing GAAP Governmental
hospitals -GASB standards identify what should be reported in the
non- operating cash flows category -Revenue associated with
operating cash flows (i.e. EHR incentive payments) should be
reported as operating revenue 12
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Medicare EHR Accounting and Reporting Disclosures Accounting
policy including financial statement presentation and method of
income recognition General description of the program Based on best
estimates subject to audit by the Federal government or its
designee, with changes in estimate recognized in the period known
Material changes in prior year estimates impacting current year
income Overall extent of disclosures impacted by materiality
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EHR Accounting and Reporting HFMA issues paper provides
practical assistance on this emerging issue but is not
authoritative. Stay tuned for additional guidance on EHR accounting
and reporting. 14
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Medicaid EHR Incentive Payments State Medicaid programs may
also establish their own EHR meaningful use incentive programs
Requirements for qualifying for receipt of Year 1 Medicaid EHR
meaningful use incentive funds may be less rigorous than the Year 1
Medicare requirements Concepts in the HFMA Medicare issues paper
may be helpful in determining accounting policy 15
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ASU 2010-23: Charity Care Disclosure
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Issued August 2010 Amends ASC 954 (Health Care Organizations)
and AAG-HCO Whats Changing? Charity care disclosure must be based
on estimated costs of providing the services -Include direct and
indirect costs -Variety of estimation approaches permitted Also
disclose -Measurement approach utilized -Amount of any funds
received to offset or subsidize charity services provided Effective
Date and Transition Effective for fiscal years beginning after
December 15, 2010 Early application permitted Requires
retrospective application to prior periods presented 18
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ASU 2010-23: Charity Care Disclosure Illustrations Organization
that uses cost accounting system data Of the Health Systems total
expenses reported ($100,000,000 and $125,000,000 in 20x1 and 20x0,
respectively), an estimated $15,000,000 and $20,000,000 arose
during 20x1 and 20x0, respectively, from providing services to
charity patients. The estimated costs of providing charity services
are based on data derived from the System's cost accounting system.
The System received $100,000 and $75,000 in contributions that were
restricted for the care of indigent patients during 20x1 and 20x0,
respectively Organization that uses cost-to-charge ratio Of the
Hospitals $80 million of total expenses reported, an estimated
$12.5 million arose from providing services to charity patients.
The estimated costs of providing charity services are based on a
calculation which applies a ratio of costs to charges to the gross
uncompensated charges associated with providing care to charity
patients. The ratio of cost to charges is calculated based on the
Hospitals total expenses (less bad debt expense) divided by gross
patient service revenue. During the year, Hospital received $2
million in grants from ABC County to help defray the costs of
indigent care 19
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ASU 2010-24: Health Care Entities Presentation of Insurance
Claims and Related Insurance Recoveries
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ASU 2010-24: Health Care Entities Display of Malpractice Claims
And Other Similar Contingent Liabilities Applies to all health care
entities Issued August 2010 Effective for fiscal years, and interim
periods within those years, beginning after December 15, 2010
Retrospective application not required 21
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ASU 2010-24: Health Care Entities Display of Malpractice Claims
And Other Similar Contingent Liabilities Whats Changing? Clarifies
that health care entities should not net insurance recoveries
against related claim liabilities. Entity should evaluate its
exposure to losses arising from claims and recognize a liability
apart from any anticipated insurance recoveries. If the entity is
indemnified for losses, it should recognize a receivable at the
same time, measured on the same basis as the related liability,
subject to the need for a valuation allowance for uncollectible
amounts. 22
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ILLUSTRATION ASU 2010-24: Health Care Entities Display of
Malpractice Claims And Other Similar Contingent Liabilities
ILLUSTRATION Facts HCOs gross liability for malpractice claims is
$5 million Of that, $1.5 million has been submitted to the insurer
under a claims-made policy Current Accounting Guidance Accrue a
liability only for claims where risk has not been transferred to
external third-party under the terms of the policy (ASC 954-450,
AAG-HCO Chapter 8) HCO accrues a malpractice liability of $3.5
million Revised Guidance (ASU 2010-24) Accrue the gross liability
Accrue an insurance receivable for claims covered by insurance at
the reporting date HCO will accrue a malpractice liability of $5
million and an insurance receivable of $1.5 million 23
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ASU 2010-24: Health Care Entities Display of Malpractice Claims
And Other Similar Contingent Liabilities Additional Clarification
(or Change!!!) Clarifies that health care entities should apply
this gross up to all similar contingent obligations (e.g., workers
compensation) The transfer of risk to a third-party concept was
removed so the gross up applies to all policies (e.g., Occurrence
based policies) The ASU requires the accrual of legal and
processing costs related to these contingent obligations (whereas,
accruing legal costs is generally considered a policy election for
other industries) 24
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ASU 2011-04: Fair Value Measurement
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Final ASU issued in May with 300+ pages Converges US GAAP and
IFRS rules on fair value measurement Effective: public entities,For
public entities, effective during interim and annual periods
beginning after December 15, 2011 non-public entities,For
non-public entities, effective for annual periods beginning after
December 15, 2011 Applied prospectively Early adoption by public
entities is not allowed, nonpublic entities can but no earlier than
for interim periods beginning after December 15, 2011 26
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ASU 2011-04: Fair Value Measurement Objectives: Primary
Objective - Consistency in word used by the standard setters
Secondary Objective Provide clarification and some refinement to
measurement/valuation Expected Impact: No significant impact to
measurement Significant additional disclosure, but generally
expected to come from information that is readily available 27
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Fair Value Accounting New Disclosures Required
Disclose/describe sensitivity of measurement to changes in inputs
Example: The significant unobservable inputs used in the fair value
measurement of ABC Companys residential mortgage-backed securities
are prepayment rates, probability of default, and loss severity in
the event of default. Significant increases (decreases) in any of
those inputs in isolation would result in a significantly lower
(higher) fair value measurement. Generally, a change in the
assumption used for the probability of default is accompanied by a
directionally similar change in the assumption used for the loss
severity and a directionally opposite change in the assumption used
for prepayment rates. Disclose ALL transfers between Level 1 and
Level 2 (not just those that are significant) For fair value
measurements included in FAS 107 disclosures, must indicate level
and significant inputs used 28
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ASU 2011-07: Presentation and Disclosure of Patient Service
Revenue
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Formerly EITF 09-H Amends ASC 954, Health Care Entities
Effective date For public entities, effective for fiscal years and
interim periods within those fiscal years beginning after December
15, 2011 For non public entities, effective for the first annual
reporting period ending after December 15, 2012 30
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ASU 2011-07: Presentation and Disclosure of Patient Service
Revenue Scope Applies to HCOs that recognize patient service
revenue at the time services are rendered even though the HCO does
not assess the patients ability to pay significantApplies only to
HCOs that have significant (not defined, so will require judgment)
amounts of such revenue patient service revenueApplies only to
provision for bad debts associated with patient service revenue
Does not apply to bad debts associated with any other sources of
revenue 31
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Examples Within Scope of ASU Hospital A serves a large
population of patients who are unable to pay for services. Hospital
must often provide treatment before it can obtain information on
patients ability to pay. Many patients accounts that would
otherwise qualify for charity care are written off to bad debts,
because the patient cannot provide required documentation. Thus,
Hospital As provision for bad debts is not a reflection of Hospital
As credit risk. Its income statement has an artificial gross- up of
revenue which is unlikely to ever be realized, with a large related
bad debt write-off -Hospital A is within scope of ASU -Hospital A
must show entire provision for bad debts associated with its
patient service revenue as a deduction from revenue Not Affected by
ASU Laboratory B assesses the expectation of collectability for
every patient. If a patient is deemed to be unable to pay (and Lab
B decides to provide the service anyway), no revenue is recorded
for that patient. Lab Bs provision for bad debts is reflective of
its credit risk. -Lab B is not within scope of ASU, because it
assesses collectability prior to providing service -Lab B continues
to report the provision for bad debts associated with its patient
service revenue as an operating expense 32
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Impact Of Adoption Of ASU 2011-07 Presentation After Statement
of Operations Net patient service revenue$200,000 Provision for bad
debts(80,000) Net revenue$120,000 Operating expenses
(list)(115,000) Excess of revenues over expenses 5,000 Before
Statement of Operations Net patient service revenue$200,000
Operating expenses: Specific expenses (listed)(115,000) Provision
for bad debts(80,000) Total operating expenses(195,000) Excess of
revenues over expenses 5,000 33
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Impact Of Adoption Of ASU 2011-07 Disclosures Sources of
revenue by major payor Policy for assessing the timing and amount
of uncollectible revenue recognized as bad debts Policy for
assessing collectability in determining the timing and amount of
revenue (net of contractual allowances and discounts) to be
recognized Patient service revenue (net of contractual allowances
and discounts) before any provision for bad debts Quantitative and
qualitative information about significant changes in the allowance
for doubtful accounts related to patient accounts receivable
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ASU 2011-07: Draft AICPA Technical Practice Aid (TPA) in
Consolidated Financials Question For a consolidated health care
entity that prepares separate subsidiary statements, do you apply
the ASU at the subsidiary level and roll the results up? Or do you
make a separate assessment for the consolidated health care entity
as a whole? ASU silent on this matter Policy decision 35
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Miscellaneous Debt Topics
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Definition Of Public Entity Some FASB GAAP differentiates
between entities with debt or equity securities that trade in
public markets and other entities Historically, has primarily
affected extent of disclosures FSP FAS 126-1, Applicability of
Certain Disclosure and Interim Reporting Requirements for Obligors
for Conduit Debt Securities Affected organizations that issue
municipal bonds through governmental issuers (conduit obligors)
Conduit obligors whose bonds trade in public markets (e.g., the OTC
market) are considered "public entities -Does not include private
placements 38
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Definition Of Public Entity Common misconceptions Public entity
status does not -Require an NPO to apply FASB standards that exempt
NPOs -Impose SEC or other regulatory filing requirements on NPOs
-Result in an NPO being required to comply with Sarbanes-Oxley In
the Codification, the public entity concept is dealt with primarily
through the Glossary and the Scope sections of topics 39
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Joint & Several Obligations Presentation in Obligated Group
members standalone financial statements Pervasive practice
allocation with disclosure Views: -Allocated portions (balance
sheet and statement of operations) -Gross Presentation (100%
recorded in each members financial statements) FASB is evaluating
the issue 40
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GASB Developments
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Comprehensive reconsideration of GAS 14 Effective for periods
beginning after June 15, 2012 Key aspects to consider: Component
unit criteria Blending Disclosures GAS 61: The Financial Reporting
Entity 42
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GAS 61: The Financial Reporting Entity Amends Financial
Accountability Concept Must be fiscally dependent on primary
government (same as before) A financial benefit or burden
relationship must also be present for the component unit to be
included If any one of these conditions exists, then there is a
financial benefit or burden relationship: Primary government is
legally entitled to or can otherwise access the organizations
resources Primary government is obligated in some manner for the
debt of the organization Financial Benefit or Burden Relationship
-Primary government is legally obligated or has otherwise assumed
the obligation to finance the deficits of, or provide financial
support to, the organization 43
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GAS 61: The Financial Reporting Entity Amends Major Component
Unit Requirements Clarifies types of relationships that affect
determination of major component units Eliminates requirement that
the determination include consideration of each component units
significance relative to other component units Amends The Criteria
For Blending Component Units When the governing bodies of the two
entities are substantively the same, a financial benefit or burden
must also exist for blending to occur Blending will occur for
component units whose total debt outstanding is expected to be
repaid entirely or almost entirely by the primary government
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GAS 61: The Financial Reporting Entity Amends requirements for
reporting the funds of a blended component unit For financial
reporting purposes, funds of a blended component unit have the same
financial reporting requirements as the primary government Provides
reporting guidance if the primary government is a business type
activity that reports in a single column Amends requirements for
reporting equity interests in component units Primary government
must report an asset for its equity interest in a discretely
presented component unit Amends note disclosures Governments should
disclose the rationale for including each component unit and the
manner in which it is included 45
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Effective for periods beginning after December 15, 2011 Key
aspects to consider: Leasing Business combinations Goodwill
Elimination of paragraph 7 option GAS 62: Codification of Pre-1989
FASB Standards 46
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GAS 62: Codification of Pre-1989 FASB Standards Going forward,
governmental entities will just rely on GASB standards If GASB
doesnt have a standard that addresses the issue, then FASB
codification can be used as an example and guide (but not
authoritative) 47
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Accounting changes and error corrections Capitalization of
interest costs Contingencies Extinguishments of debt Imputation of
interest costs Investments in common stock Leases Regulated
operations Special and extraordinary items Statement of net assets
classification GAS 62: Specific Topics Addressed 48
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GASBs Technical Agenda (Active Projects) EDF Derivatives:
Application of Termination Provisions4Q102Q11 Postemployment
Benefits Pension2Q112Q12 Deferred Inflows and Deferred Outflows,
and Net Position3Q111Q12 Postemployment Benefits OPEB2Q122Q13
Financial Guarantees2Q124Q12 Business Combinations2Q121Q13 ED
Exposure DraftF Final Standard 49
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Question & Answer Session
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Disclaimer 51 The views expressed in this session are the views
of the expert panel member and do not necessarily represent the
views of the AICPA, the financial accounting standards board, or
other authoritative entity.